CFA Level I
Corporate Issuers
Formula Reference Sheet
Weighted Average Cost of Capital (WACC)
WACC — Use Market Value Weights
WACC = (Wd)(rd)(1−t)
+
(Wp)(rp)
+
(We)(re)
Wd, rd = weight & cost of debt (after-tax)
Wp, rp = weight & cost of preferred stock
We, re = weight & cost of equity
t = tax rate
Cost of Capital Components
Cost of Preferred Stock (rp)
rp = DividendCurrent Share Price
Cost of Equity — CAPM (re)
re = rf + β(rm − rf)
Use βL (levered/equity beta) ·
MRP = rm − rf (Market Risk Premium)
Justified P/E from Gordon Growth
P0E
=
Dividend Payout Ratior − g
Adjusted Beta
βadj = 23 βraw + 13 (market beta = 1)
Blume adjustment — betas mean-revert toward 1
Levered & Unlevered Beta
Levered (Equity) Beta — B’e
B’e = Bu
[
1 + (1−t) D’E’
]
Equity beta · Bu = asset beta
Unlevered (Asset) Beta — Bu
Bu = Be
[
1
1 + (1−t) DE
]
Asset beta · Be = equity beta
Degrees of Leverage
Degree of Total Leverage (DTL) = DOL × DFL
DTL
Total Leverage
=
DOL
Operating Leverage
×
DFL
Financial Leverage
DTL = %Δ in Net Earnings / %Δ in Unit Sales
DFL = %Δ in Net Earnings / %Δ in Operating Earnings (EBIT)
DFL = %Δ in Net Earnings / %Δ in Operating Earnings (EBIT)
Degree of Operating Leverage (DOL)
Q(P − V)
Q(P − V) − F
P−V = contribution margin · F = fixed costs
Degree of Financial Leverage (DFL)
Q(P − V) − F
Q(P − V) − F − I
I = fixed financing costs (interest)
Degree of Total Leverage (DTL)
Q(P − V)
Q(P − V) − F − I
Q = units · P = price · V = variable cost/unit
Break-Even Analysis
Break-Even Quantity (QBE) — Operating + Financial
Fixed Operating Costs (F) + Fixed Interest (I)
total fixed burden
÷
(P − V)
contribution margin
Operating Break-Even Quantity (QOBE)
Fixed Operating Costs (F)
operating fixed costs only
÷
(P − V)
contribution margin
P = price per unit · V = variable cost per unit
P−V = contribution margin per unit
P−V = contribution margin per unit
Operating Cycle & Working Capital
Operating Cycle = DSO + DOH − DPO
DOHDays of Inventory on Hand
+
DSODays Sales Outstanding
−
DPODays Payables Outstanding
Also = Net Cash Conversion Cycle (same formula)